All taxes do harm, not just those Star Tribune might pay

Is there reason for hope in Editorial Board's momentary change of heart? Well ...

By CRAIG WESTOVER

February 19, 2013 — 9:38pm

Carlos Gonzalez, Dml - Star TribuneMinnesota Governor Mark Dayton delivered his State of the State address before a joint session of the Minnesota Legislature in the House Chambers at the Minnesota State Capitol in St. Paul, Minn. on Wednesday.

When bullets are flying and bombs falling, there are no atheists in foxholes; nor are there so many liberals on the Star Tribune Editorial Board.

In the cross hairs of Gov. Mark Dayton's business-to-business sales tax proposal, the Editorial Board had a come-to-Jesus economic revelation: Taxes have unseen negative consequences that ultimately hurt the people they intend to help.

"Relying heavily on this revenue source," wrote the board of Dayton's business tax, "suggests that the administration either did not understand its implications, or understood but did not deem them important. Either explanation is troubling."

The board understands that Dayton's business tax is "unfair" and "uncompetitive" and affects the middle class through "higher prices and, for workers in the most affected industries, in lower wages and lost jobs."

The question is: Does the board also realize that such negative consequences are not unique to Dayton's business tax? All taxes, albeit to varying degrees, yield the same negative consequences irrespective of their good intentions.

Unfortunately, there's also enough in its antitax editorial to suggest that the board either does not understand that implication of its position or understands it but chooses to ignore it when, in the board's opinion, specific ends justify calls for more state revenue. Either explanation is troubling.

The first economic principle the paper discovers is that many businesses have "little or no ability to pass on the [Dayton business] tax to their customers."

Does this imply that passing the tax on to consumers, raising prices on rich and poor alike would make Dayton's business tax OK?

Prices are always determined by what the market will pay and not by what the vendor wants to charge. If raising the price of an item in response to a tax increase drives the price beyond what some people are willing to pay, they will buy less of the product or switch altogether to substitutes. When prices are not raised, the new costs can force marginal producers out of business. It's a net loss for the economy as a whole either way.

A second economic revelation for the board is that taxes distort the market.

"A tax on business-to-business services would distort the choices businesses make about purchasing or keeping in-house accounting, legal and computer services," noted the editorial. "It would favor large companies with big back-office operations over small firms. It would put Minnesota engineering, architectural, scientific and consulting firms at a disadvantage."

What is true in this specific case is true in general: Every tax, large or small, for whatever purpose, legitimate or frivolous, redistributes wealth and distorts the market. The broader the scope of government, the higher the tax rate and the more targeted the tax, the greater and more harmful the market distortion.

High-rate, narrowly targeted taxes motivate targeted groups to make less-than-optimal economic choices that they would not make in the absence of the tax. Targeted individuals make business decisions that are in their self-interest but weaken the overall economy.

Normally, the Editorial Board is fond of the refrain that Republicans would deny hardworking Minnesotans a livable wage, health insurance and a world-class education to give tax breaks to millionaires, so it is interesting that the victim trotted out in the paper's denunciation of the Dayton business tax is the president of the Carmichael Lynch advertising firm.

"Competitive pressure limits his ability to pass a sales tax on to his clients through higher fees. Instead, his agency's jobs and payroll would suffer if the proposed tax becomes law," noted the editorial.

Really?

Might not Carmichael Lynch executives and investors simply accept lower salaries and profit margins? The firm's president surely makes a lot more than that guy or gal in the mailroom. He can afford to take a hit. Isn't Dayton's business tax just another opportunity to make the rich "pay their fair share?"

This time the Strib gets it right -- Carmichael Lynch, its investors, executives and employees down the line to that guy or gal in the mailroom would be victims of Dayton's business tax. But what about people earning more than $250,000 a year under Dayton's "tax the rich" crusade, or the medical providers and insurance companies expected to absorb the costs of Dayton's health insurance exchange and employers who may have to cope with Dayton's minimum-wage increase? How are they different than the 1-percenters at Carmichael Lynch?

The board's analysis of the Dayton business-to-business tax is spot on. I can only hope that this discovery of economic principle is a true road-to-Damascus experience and not simply a foxhole conversion to be recanted the next time the Editorial Board lusts after more government revenue.